India-Korea CEPA: Finalizing the Review
The growing economic and trade ties between India and Korea have strengthened in the recent years. In 2018, the two countries' annual trade surpassed the $20 billion mark for the first time. Through the CEPA, India and Korea have been able to improve their trade and investment relations. In 2018, India’s foreign direct investment to Korea reached the $1 billion mark. Korea's total foreign direct investment (FDI) to India for the period from September 2019 to September 2020 is $6.29 billion. These include investments from various companies such as Tata Daewoo, Ssangyong, and Novelis.
As part of their ongoing negotiations, India and Korea have decided to establish a Joint Working Group on Shipbuilding Industry to further strengthen their cooperation. They also planned to establish an Amended CEPA to promote energy efficiency. ROK also offered to provide India with $10 billion to finance infrastructure projects. Prime Minister Narendra Modi and South Korean President Lee Myung-bak addressed the first India-Korea CEOs Forum to promote economic cooperation. The Korea Plus desk was established to address the various issues raised by Korean companies during the visit of President Moon Jae-in. During his visit to ROK, Prime Minister Narendra Modi and President Moon agreed to boost bilateral trade to reach the target of $ 50 billion by 2030.
Korean Economy and Its Linkages with India:
From 1962 to 2017, Korea's GDP has more than tripled from less than $2 billion to over $1 trillion. It is the 12th largest economy in the world based on 2017 GDP. Korea's per capita income was $ 29,745 in 2017. The country's services, manufacturing, and agriculture sectors have contributed significantly to the nation's economic growth. Despite its dependence on natural resources, Korea has managed to maintain its status as a low-cost producer of goods. In 1996, Korea became a member of the OECD. Due to its membership, it became the 29th member of the organization. Its imports decreased 17.8 per cent to $468.5 billion. Its total trade with its major trading partners is valued at over $500 billion. Korea is the world's largest shipbuilding industry. It is also among the top producers of electronic products. Both India and ROK have different economic paths that they have pursued since their independence. With huge market potential, both countries are expected to benefit from each other's growth. ROK has a wide range of expertise in various areas such as shipbuilding, steel, power, and nuclear energy. ROK is a tech firm that wants to capitalize on India's growing expertise in information technology (IT).
India's export potential can be expanded by focusing on high-tech products such as software and hardware, which can be used in Korea. Even though India used to have an advantage in textiles and garments, ROK is now exporting its finished products to foreign markets. In 2018, India’s share of Korea's global trade has increased manifold since 2001. It is the 20th biggest source of imports for Korea. Over the last four decades, Korean exports have shifted to higher-tech and knowledge-based products as they became more valued. One of the barriers that India faces is the restriction of the import of certain agricultural products into Korea. These include fruits and vegetables. To overcome this barrier, India has to compete with Korea in the procurement of primary agricultural products. This is one of the barriers that India faces in its trade with Korea. There is also a need for diversifying the export products that are mainly driven by petrochemicals, such as naphtha. Major items of India's export to Korea are mineral fuels, oil distillates, cereals, iron, and steel. Naphtha has become the most important item of India's export to Korea since 2015. In 2018, it became the second most valuable import after mineral fuels. Aluminum and articles thereof saw a 6.5 per cent increase in import. The import of organic chemicals also grew by 29 per cent. Korea's main export to India are various products such as automobile parts, electrical machinery & components, and petroleum refined products. Among the top ten items that were mainly exported to India in 2018, electrical machinery and equipment showed a decline of -16.6 per cent in sales. Iron and Steel increased by 23.7 percent, while nuclear reactors, boilers, and plastic articles saw their value increase by 24.7 percent.
Review of Comprehensive Economic Partnership Agreement (CEPA):
On August 7, 2009, India and Korea signed a Comprehensive Economic Partnership Agreement(CEPA). The agreement became operational on January 1, 2010. The CEPA is Korea’s initial free trade agreement with a fellow member of the BRICS group. It was signed in June 2016. The deal will remove or lower import tariffs on various goods over the next eight years. In response to the review of the CEPA, India would phase out or reduce its tariffs on about 85 per cent of its exports to South Korea. The ministry has organized a meeting with various export promotion councils to discuss the barriers that they face in exporting to Korea. As India and South Korea begin negotiations for the revision of the CEPA, the country's export organizations are likely to provide their input on the proposed changes. If India’s trade deficit with South Korea remains unresolved, it will be important to examine if the country’s exporters face various trade barriers in their shipments to the Asian nation, a senior official said. According to him, India's trade deficit with South Korea has increased significantly due to the implementation of the CEPA. In 2019, India's exports to South Korea amounted to around $5.6 billion, while its imports from that country were about $15 billion. As part of its CEPA review, the government should also investigate the reasons behind the decline in Indian exports to South Korea.
Other Aspects:
In the first year of operation of the CEPA, the trade between Korea and India grew by 40 per cent to over US $17 billion. During the second year of the implementation, the trade between the two countries expanded by 20 per cent. In 2014, India's imports from South Korea dropped 14.7 per cent due to the country's unstable economic climate. In 2015, the decline in India's imports was mainly due to the lower prices for raw materials and oil. In 2016, Korea's import from India decreased by 1.2 per cent. In 2017, however, the country's import from India increased by 18.1 per cent. The objective of the Committee is to regularly review the implementation of CEPA. The first meeting of the committee was held on January 20, 2011. This meeting was held to establish a Joint Committee to assist the Joint Committee in carrying out the CEPA's operation and implementation. The two sides also agreed to merge the existing Joint Trade Committee into the CEPA. It was also noted that the ROK's concessions exceeded those of the EU in terms of Free Trade Agreement. The two sides also set up an ad hoc working group in May 2012. Both sides agreed to establish a joint committee to promote trade and investment between India and Korea. The meeting took place on July 11, 2013, in Seoul, Korea. On June 18, 2016, the Joint Committee to review the India-ROK CEPA was held. It was co-chaired by the Ministers of State for Commerce & Industry and ROK. Korea Plus is a special cell established by the two Ministers to provide hand holding services to Korean companies in India. As per the data available with the Export Import Bank of Korea, India received over $6 billion worth of Korean FDI in 2019.
Almost all of the Korean companies operating in India are wholly owned, while the others have joint ventures. Most of the time, Korean companies own the joint ventures, while Indian companies only own a small portion of them. This is mainly due to the lack of enthusiasm for entering India by Korean SMEs during the mid-1990s. Due to the large-scale investments made by Korean enterprises, they were able to establish their brand image on an early stage. This strategy allowed them to negotiate with local governments. The Korean model of investing is different from the Japanese one, which usually involves participation as a minority investor. This method of working typically involves setting up joint ventures or acquiring stakes in other companies.
Post Pandemic Focus on Comprehensive Partnership:
The India-ROK partnership has gained new momentum in the past couple of years. As part of their Special Strategic Partnership, regular dialogue sessions, visits, and increased defense and economic cooperation are becoming more common. Aside from improving their relations, India and South Korea must overcome various obstacles to achieve their comprehensive partnership. India’s commitment to its Special Strategic and Global partnership with Japan has made the Republic of Korea more cautious about recognizing India as a partner. South Korea’s economic ties with China have made it reluctant to endorse the Indo-Pacific Initiative. This, however, makes it an ideal partner for India. As two of the largest economies in Asia, the expansion of ties between South Korea and India could contribute to regional peace and security. Even with the growing tensions between China and India, the two countries may still deepen their bilateral relationship by pooling their diplomatic resources and participating in the Quad Plus. A stronger India-ROK relationship would allow the two nations to develop their own security and economic models. As partners of the US, India and ROK can help ensure the continued presence of the US in the region. Through their various sectors, they can also help expand the scope of their relations. As India and South Korea step up their engagement, New Delhi can benefit from the Seoul's new Southern Policy.
Both the US and China believe that their ties can promote regional peace and security. Despite its successful response to the pandemic, Seoul’s economy continued to shrink in the second quarter of 2020. It was the worst performing major economy in the region during the 1998 Asian Financial Crisis. In response to the economic setback, Moon has announced the K-New Deal, which aims to create jobs and stimulate economic growth. It involves implementing various projects worth 160 trillion won over the next five years. India's economy has entered a recession due to the SARS pandemic and the global economic slowdown. Prime Minister Narendra Modi has advocated a more self-reliance strategy to boost domestic production and reduce dependence on China. The South Korean New Deal is in sync with India's plans for smart cities, digital innovation, and foreign direct investment. It is also in line with the country's strategic trade ties with the region. In response to China’s growing assertiveness, India and South Korea are looking for alternative supply chains. As a result, both India and South Korea are looking to improve their trade relationship. Over the past decade, their trade deficit has remained relatively unchanged. In 2018, the leaders of India and South Korea agreed to improve their trade ties amid the escalating US-China trade war.
To boost trade, both India and Korea will need to recognize the importance of increasing their supply chains and attracting more foreign direct investment. With many Indian companies having established footprints in South Korea, the potential for more business ties is also promising. Samsung is reportedly planning on setting up a manufacturing facility in India to create around 1,300 jobs. In India, Samsung is one of the 22 companies that have committed to produce cell phone in the country. Its total investment in the sector is expected to reach about 1.5 billion US dollars. The digital sector can also help improve the relations between India and South Korea. There has already been an interest in developing collaborations in this area. The K-New Deal aims to build a digitally powered society by 2022, which involves the development of 5G networks and artificial intelligence. India’s various digital initiatives like Digital India and Smart Cities Mission are focused on improving the country’s digital infrastructure. Seoul is exploring ways to boost its infrastructure development in Asia's Pacific region.
There are numerous opportunities for India and the Republic of Korea to collaborate on various infrastructure projects, such as the establishment of smart transportation and inland waterways. With the ACCC's expanded capabilities, it can help boost cooperation between various countries within the Association of Southeast Asian Nations (ASEAN). For instance, the Kaladan multi-modal project could help improve connectivity between Thailand, India, and South Korean projects in Myanmar. The exercise, which was carried out in the South China Sea and the Indian Ocean, aimed to improve the security of the communication links between the two nations. In July, the defense ministers of the ROK and India committed to boost their countries' defense industrial and technology partnership. Artificial intelligence-capable weapons could be of great interest to South Korea. As India’s economy grows, it is likely to acquire more equipment from Korean companies. One of these is the K9 Vajra-T howitzer, which was made by Hanwha. Defense equipment supply chains can play a vital role in improving the security and trade ties between states.
Conclusion:
Climate change is threatening India's economic growth. According to recent studies, it has already affected the country's gross domestic product (GDP) by 31 percent over the past 50 years. This will also impact India's security environment. There are opportunities to expand India's green economy cooperation with ROK. India could become a major player in the electric car and energy-efficient homes markets. This includes plans to create 230,000 energy-efficient homes by 2040. With the growing importance of climate change, both China and the US have plenty of room to cooperate and share their knowledge to minimize greenhouse gas emissions. As India and South Korea look to carve out a greater role in the region, they are thinking of creating a common security and peace platform. As South Korea broadens its horizon beyond the Korean Peninsula, India has the potential to become a critical partner in the Indo-Pacific region.
Pic Courtesy-Valery Rabchenyuk at unsplash.com
(The views expressed are those of the author and do not represent views of CESCUBE.)
